Q1. Regarding Fiscal Federalism in India, which of the following statements correctly explains the constitutional framework and practical challenges related to financial relations between the Union and the States?
- (a) The Finance Commission’s recommendations are binding on the Union and the States, and the President is constitutionally obligated to implement them without any modifications.
- (b) Article 280 mandates the appointment of a Finance Commission every five years to recommend the distribution of tax revenues between the Union and the States, but its recommendations are advisory and not binding.
- (c) Under the Goods and Services Tax (GST) regime, the States have completely ceded their taxation powers to the Union, making fiscal federalism obsolete in India.
- (d) The Constitution grants equal financial autonomy to all States irrespective of their revenue-generating capacities or development levels, ensuring uniform fiscal federalism.
Answer & solution
Answer: (b) Article 280 mandates the appointment of a Finance Commission every five years to recommend the distribution of tax revenues between the Union and the States, but its recommendations are advisory and not binding.
Article 280 requires the President to constitute a Finance Commission every five years or earlier, and its report is advisory — it is laid before Parliament with an action-taken memorandum.
States kept their taxing powers under GST through the GST Council, and the Constitution itself recognises unequal capacity by providing grants-in-aid.
Revision note — Finance Commission and Centre-State financial relations
• Article 280 — the President constitutes the Finance Commission: a chairman and four other members, normally every five years.
• It recommends the distribution of net tax proceeds between the Union and the states and among the states, the principles of grants-in-aid, and measures to help panchayats and municipalities.
• The First Finance Commission (1951) was chaired by K. C. Neogy. The 15th, under N. K. Singh, covered 2021-26 and fixed the states' share of the divisible pool at 41 per cent.
• The 16th Finance Commission, chaired by Arvind Panagariya, was constituted in December 2023 for the award period 2026-31.
• Article 275 gives statutory grants-in-aid on the Commission's recommendation; Article 282 allows discretionary grants for any public purpose.
• Article 265 — no tax without authority of law. Article 266 — Consolidated Fund; Article 267 — Contingency Fund.
• GST came through the 101st Constitutional Amendment Act, 2016, and the GST Council sits under Article 279A, chaired by the Union Finance Minister.
• In the Council the Centre holds one-third and the states together two-thirds of the votes, and every decision needs a three-fourths majority — so the states did not surrender their taxing power.
Do not mix these up
• Finance Commission vs NITI Aayog — the Finance Commission is a constitutional body under Article 280 that divides tax revenue; NITI Aayog is an executive body with no devolution role.
• Article 275 vs Article 282 — Article 275 grants are statutory and follow the Commission's advice; Article 282 grants are discretionary.
Also asked from this topic: the Article that sets up the Finance Commission (280); whether its advice binds the Union (no, it is advisory); who appoints its members (the President).